Question about option trading

Discussion in 'Options' started by JosephF, Oct 22, 2008.

  1. JosephF


    I'm posting this thread in hopes to find some one to steer me in a good direction in understanding options. I get the basis of their function, but do not know how to calculate gain... only loss because the contract goes to zero. If people could possibly send me good links or past experiences it would be greatly appreciated.
  2. MTE


    You may wanna make your question a bit more specific as it is not really clear what you are asking.

    To calculate your gain/loss on any instrument you simply deduct your purchase price from your sale price, and it doesn't matter whether you go long and then sell or go short first and then buy it back.
  3. 1) It's a bad idea to hold an option until it expires worthless.

    2) If the stock does not move the way you anticipated it would, sell out your option and take the loss. At least it won't be a 100% loss.

    3) Making money when buying options is very difficult. Very. You must not overpay for the options. You must predict in which direction the stock will move, predict the timing of that move and predict the size of the move (because of the strike price you chose).

    4) Try option spreads to cut risk

    5) Consider selling option spreads instead of paying money for options.

    6) If stock is 80 and you are bullish - you could sell the 75 put and buy the 70 put. Limited loss. Limited gain, but much higher probability of gain than what you are doing now.

    For lots of good material for rookies, take a look at my blog or website.

  4. daynyt brings up a good idea. stick to spreads until you understand what you're doing and how options work. stick to credit spreads (where you get paid to put the spread on) if possible and covered options.

    Write (sell) one call versus 100 shares of any stock and watch your position every day.

    Or. buy one put and sell a lower put with the same expiration month and watch the position (including the greeks). Same thing with calls. Buy one call and sell call with higher strike. You have no risk in these positions other than your initial investment.
  5. Why wouldn't you just buy the spread, e.g. buy the bear put vertical rather than sell the bear call vertical, assuming liquidity and assignment are not an issue? After all, 'margin' is the same for both unless you have a portfolio account.
  6. They are equivalent positions, so you can do either. Personally, depending on the price at which I can trade, I'd rather have the cash in my account than pay out that cash.

    Either of these positions is equivalent to owning a collar, but whey bother to buy stock when it's not necessary?

  7. ???
    1. you are charged margin for the short vertical so this 'cash in my account' is an illusion.
    2. why are you mentioning buying stock? We were simply talking about verticals and the point I was questioning was in regard to choosing a short over a long vertical (yes, I know a collar is a synthetic version of a vertical and a married put is a long call equivalent etc. etc.). Personally I don't think it matters much which you choose since they are, as you mentioned, equivalents. But I was intrigued to find out your reasons for preferring credit verticals rather than debit ones.
    So far I can't see any compelling advantage of one over the other - it just comes down to which one gets a better fill.
    As for the collar versus the vertical, there is a difference in the way one can manage the collar versus managing the vertical - but that's another topic again.